Deep Yogurt

Technical innovation is important, but biopharma companies will need operational innovation to thrive in the current environment.

BY DANIEL S. LEVINE
The Journal of Life Sciences

The pharmaceutical industry, as my employer is want to say, is in deep yogurt. The boss is a polite guy, but suffice it to say he’s not talking about boysenberry here. Rather, he is referring to the type of yogurt you want to be sure you don’t step in.

Eroding margins, cost containments pressures, patent expirations, pipeline problems, and increasing challenges on the regulatory front are just some of the issues the industry is contending with these days.

Can innovation solve the industry’s problem? Well, that all depends in how broadly you think of innovation, according to Rob Franco.

Franco, lead director for the life sciences business group for PRTM Management Consultants, was part of a team that included the Tufts Center for the Continuing Study of Drug Development that looked at how biopharmaceutical companies can succeed in the current landscape. To find out, they surveyed 11 large pharma and ten small and medium biopharmaceutical companies. These companies represented 91 percent of 2006 revenues in the biopharmaceutical industry.

First they took quantifiable measures of innovation (percent of approvals, percent of priority FDA approvals, first cycle drug approvals) and then looked to see if they correlated with measures of financial success (revenue growth, margin growth). They found a strong correlation between the two.

Among the large pharmaceutical companies, the most innovative ones enjoyed three times faster revenue growth than their competitors. These companies also experienced a 17-month approval advantage from regulators for first-in-class drugs and drugs from these companies won approval 40 percent more often during their first regulatory review without any need for additional testing or information. These companies also received 15 percent more priority reviews than average companies.

But being technically innovative is not enough, according to the study, which is expected to be published in September.

“While most everyone will agree that the biopharmaceutical industry is driven by innovation, when you dig a little bit deeper you find that innovation is really a bit narrowly defined by this industry,” said Franco. “They really talk about technical innovation – the next monoclonal antibody, the next new drug, the next exciting new target.”

Outside of the industry, Franco said, innovation is viewed more broadly. Whether its design innovations at Apple, manufacturing innovations at Toyota, or supply chain innovations at Dell, companies have been able to take technical innovation and marry it to other sources of innovation to establish competitive advantages that gives them a new position in the marketplace.

“Pharmaceutical companies in the future are going to have to marry their technical innovation with some operational innovations to have some sustainable advantages,” he said.

This means a move away from vertically integrated business models where a pharmaceutical company tried to do everything itself, to a model characterized by flexibility to develop drugs across different areas and therapeutic categories with resources, ideas and capabilities drawn from sources outside a company’s four walls, collaboration of increasing sophistication, and standardized business practices that help fuel cost efficiency and make it easier to integrate partners, vendors and CROs into an operation.

Franco said the big surprise is that no one appears to be making radically changes to their operating models yet. He thinks there are plenty of opportunities to be more innovative as companies struggle to maintain their positions in the market and look at how to better incorporate such things as molecular diagnostics, patient services, and payer needs into their development practices.

He believes innovation solve the industry’s problem, but innovation broadly speaking.

“They are going to have to marry technical innovation with operational innovation to do so,” said Franco. “Technical innovation alone is not going to be the answer for the industry.”